At the same time, I've got about $8500 left to pay off on my student loan, with all the interest that includes (6%/year, compounded monthly).

I want to pay my student loan off as fast as possible, and I have been considering just dumping my savings into the loan, either once the two equal each other, or immediately.

I'm not currently putting any money into my savings because I'm trying to pay off that loan first.

Alternately, I could dump some of my savings into the loan so that I'm not left without a safety net in case of emergencies - but I'm not sure how much I should reasonably keep in Savings for such emergencies.

FTR: Breakdown of my income/expenses. I have no other debt besides my student loan, and while I use a credit card, I use it only to make purchases I can pay for, and always pay off the full balance.

Income: $2900/mo

$1400/fortnight my income(ususally $2800/mo, steady job).

~$100 Wife's income/mo (Not consistent - based on commissions)

Expenses: $2160/mo

$975 Rent/mo

$110 Elec/mo (higher in the summer due to air conditioning needs)

$75 Internet/mo

$160 Phone /mo

$500-600 Food/mo (2 people)

~$100 set aside for luxuries/mo

$250 Student Loan Payment /mo

So, in short, should I dump some or all of my savings into my student loan, should I do it now or when I've paid off a bigger portion of that loan, or is this an entirely unreasonable plan?

Side Note: Since it's getting mentioned a lot, there are a few 'hidden' expenses that aren't being shown here because they get taken out of my paycheck pre-tax. There's $100/mo for 2 month-long bus passes, $185 for health insurance including dental (going independent right now would be insanely expensive, so we're planning to switch once my company's open enrollment starts) and 3% of my pre-tax paycheck going into a deferred compensation plan.

Depends on the Interest Rate (IR) of the loan. Also, summary of income and expenses if you could please include those in the question you might get a better answer.
– RossAug 17 '16 at 14:37

@Ross Added as per requested. Food is based on roughly a $150/week grocery bill, luxuries are an approximate what we spend per month on non-essentials, some months it's more, some months it's less.
– ZibbobzAug 17 '16 at 16:16

5

By "6% interest monthly" do you mean a 6% annual rate that is compounded monthly?
– BrenBarnAug 17 '16 at 19:07

6 Answers
6

Keep 3-6 months (or more if you need to, for me the number is 9 months) worth of expenses in an emergency fund. Put the rest against the student loan.

The length of time depends on your situation. I have family, and work in IT. Changing jobs takes me longer, because ... reasons. Having less than 6-9 months of buffer means that I have to rush and possibly take a position that is not a good fit, or get behind on payments.

So, set aside your emergency fund, add to it if you need to. Once it is fully funded, take the money you were using to fund the emergency fund and budget that to clearing student loans. Also, don't start new credit cards, and be sure to never carry a balance on them.

I know it seems like a lot, but keep in mind that yours is small, and you'll likely be able to knock it out in a very short time.

Edit (after OP listed expenses): Taking into account the expenses you listed, it looks like you have about 2000 per month in expenses (if you're in emergency fund mode, luxuries can wait, and you can tighten the belt on food, so go with the lower end of your estimate.) Lets say you have 600 a month to work with. My suggestion would be bring savings up to $6000. That will take you two months. Then pay 850 a month to student loans. You'll be paid off in a year, and still have 6000 for emergencies.

Once you're done, you will have 850 a month to save and invest. With patience, persistence and care, you can start a nest egg that will allow you to remain financially independent. Search around for FIRE (financial independence, retire early) and other strategies for retirement savings and investing. Be sure to save for retirement. The worst inheritance to leave your loved ones would be to become financially dependent upon them in your later years. And watch out for credit, it's a trap.

Why would you suggest not starting new credit cards? One of the indicators used for credit score is age of accounts. If OP never starts accounts then that indicator can't help the score. Similarly one of the indicators is utilization of credit and the denominator of that is available credit. If OP never gets new cards then that will also suffer.
– Dean MacGregorAug 18 '16 at 5:25

2

OP should establish good habits, so as not to end up much further down the road, deep in debt and full of regret. Once all the debts are settled, if OP wants to buy a house, then using a card to build credit history is certainly an option. The concept of making your money work for you instead of paying others to use their money should be ingrained though. This will ensure OP always pays CC in full, on time, every month.
– XalorousAug 18 '16 at 13:56

1

OP didn't say anything that should lead you to the conclusion that they have a reasonable likelihood of being deep in debt in the future. Given that, telling OP not to get additional credit cards is off topic with respect to the question.
– Dean MacGregorAug 18 '16 at 16:43

@DeanMacGregor I never said OP would end up deep in debt. I said, and you can read it above, that establishing good habits prevents it. Beyond that, we obviously have widely separate philosophies regarding debt.
– XalorousAug 18 '16 at 19:29

"OP should establish good habits, so as not to end up much further down the road, deep in debt and full of regret." That was your answer to my question " Why would you suggest not starting new credit cards?" While you didn't explicitly say OP would definitely end up in debt, you did insinuate that if OP opens anymore credit card accounts they could end up "deep in debt and full of regret" which is unsubstantiated.
– Dean MacGregorAug 18 '16 at 20:08

Liquidity. That's the issue. You rent, and that's not bad. No new roof, boiler, etc. But, you have a car? Your savings is a guarantee that you'll not have to charge a $2000 transmission on an 18% credit card. You job may be secure, but employment (aside from self employment) is never 100% guaranteed. With $3000 income per month, I'd not prepay the student loan until I had at least $9000 in savings.

We don't know your country, although we don't have fortnights in the US, so if you are in the US, you have a non-US background. Either way, if your employer offers any kind of matching retirement deposits, I'd prioritize that. Never leave that matched money on the table.

You are off to a great start, this relatively low student loan debt shouldn't keep you awake at night.

For the record, I don't have a car. Note my expenses - a car was not forgotten, it was not included because I don't have one. Also, I'm in the US, and I just happen to know what a fortnight is. ;) You do have a good point about expenses though, since we are looking into a new mattress for our bed, and a new computer once my current one becomes too obsolete.
– ZibbobzAug 17 '16 at 19:20

1

"dental work that's beyond what the insurance covers." That's what I meant to say. Hopefully you and your wife have teeth and never need expensive work. That's my new go-to unexpected expense for the non-car-owning renter!
– JoeTaxpayer♦Aug 17 '16 at 19:23

3

@Zibbobz "since we are looking into a new mattress for our bed, and a new computer once my current one becomes too obsolete". These are not the expenses for which you're setting aside your emergency fund. That money is for unplanned expenses. The mattress and the computer are planned. I'd get the mattress first, save for 6-12k (3-6 months of expenses), pay off the student loans, then save for a computer. However, JoeTaxpayer makes a great point. Fund any retirement plan where you work up to the full level that your company matches. You should stop what you're doing and do that now.
– XalorousAug 17 '16 at 22:52

@DavidWallace Matching is an instant 100% ROR. Put in $100 and you have $200. $100 profit. 100/100*100 = 100%. Plus it is more effective the further you are from retirement, due to the power of compounding. Even if the funds in your 401(k) lose value, it will take years to bring your ROR down to 6%.
– XalorousAug 18 '16 at 14:00

Great work so far, and good question. I think a lot of it depends on how risky your financial life is.

For example lets say that you are working a temp or contract job that ends in 3 months. That is also the same month your savings and student loan will be equal. I think most would agree that it would be foolish to empty out your savings in such a risky month.

Now same situation one month later. The company you were working for takes you on as a full time employee. I would go ahead and empty out my savings and make the student loan go away.

There could be other risks to consider like needing a different car, moving to a new place, potential medical bills, or a needing to travel. Anything like that on the horizon I would hold off emptying out my savings. However, once it is smooth sailing GO FOR IT!

Here's what I'd do. Show these figures to your bank, and ask if they can offer you some type of account with a small overdraft, say up to $2000. Typically this won't pay the same kind of interest as your savings account, but it doesn't matter.

If such an account is available, then yes, dump most of your savings into the student loan, and keep a few hundred in your new account. The overdraft on this account is your emergency fund. This means that in the more likely scenario (no emergencies) you're saving yourself 6% interest on something like $4000 to $4500. In the case of an emergency, you're still covered; but you'll be paying a larger amount of interest. Let's say you have an emergency cost and need to dip into the overdraft for $1000. If the interest is 15%, then you've cost yourself an extra 9% on that $1000 over leaving that debt in the student loan. This seems to me like a really good gamble - more likely to gain 6% of $4000, less likely to lose 9% of $1000.

If your bank won't give you a low-interest account with a small overdraft, then use your credit card as your emergency fund. The same kind of logic applies; but since credit card interest rates are typically higher than overdraft interest rates, you'll want to keep slightly more in your savings account. About $1200 to $1500 feels right to me; and move the remaining $3500 to $3800 to your student loan.

So yes, pay off the student loan. That 6% interest really is worth having, even if you'd be taking a small gamble.

Edit - Alexander Kosubek has suggested that I should compare this to matched retirement plans. The 100% gain in a matched retirement plan isn't 100% per annum; it's 100% divided across the length of time you have to wait until you can get your hands on that money. Suppose the money is accessible when you turn 60 - a matched plan is a good deal if you're in your 50's, but not so good if you're in your 20's. The 100% matching is equivalent to 6% interest per annum compounded over slightly under 12 years.

So if you're less than 12 years away from retiring, go for the matched plan. Otherwise, pay off your student loan first.

+1 because of the good point of evaluating interest rates and likelihood of incurring them against each other. - There are still other things to consider, though, as others have noted, like matched retirement plans, which get you a gain of 100%. ;)
– Alexander KosubekAug 18 '16 at 6:28

Thanks, David, for the clarification! I was aware of the fact and maybe shouldn't have stated it in my comment in the ambiguous way I did. But then it did make your answer better in the end... :)
– Alexander KosubekAug 18 '16 at 7:51

1

@DavidWallace the matching is not equivalent to interest. It is equivalent to return. AND it gains further return down the road. It is almost free money. The cost of it is the time that it is not solvent. Since most companies only match the first few percent, it makes sense to put that percent into 401(k) first. Then the remainder of the check goes into the budget. Also, due to that deduction from your check being pre-tax, the actual amount that your check goes down is only about 70-80% of the contribution. Also, your calculations ignore the returns on your contribution and the matching.
– XalorousAug 18 '16 at 14:09

1

10k debt @ 6% interest, $200 monthly payment. 0k retirement @3% interest, first 100 matched. You have $400 to work with. If you pay normal payment and invest the rest, the loan takes 5 years to pay and the retirement fund is at $18,700. If you invest 100 and pay 300 to the loan, it takes 3 years to pay and at the end of 5 years, you have $19,200. If you pay 400 to the loan and invest nothing, you pay the loan in 28 months, and at the end of 5 years you have $16,200. The huge drop in the last one shows the power of the matching. Combine that with the power of compounding over 20 years...
– XalorousAug 18 '16 at 22:16

I would not advise you to go entirely broke in order to clear debts. You could use the cash you have to invest, or render some other services other students need in school while you raise cash from doing so.

Since you are considering dumping your savings into your student loans when they are equal, you should go ahead and do it now. You will immediately reap the benefit of paying less interest per month. Also, your minimum monthly payments will decrease so if you had unexpected expenses pop up, you could shrink your payments for a limited time. If you don't have emergency expenses, more of your regular monthly payment will go toward the principle of your loan and pay it off faster.

Make a goal to get your savings back up as soon as you can after your loans are paid off. In the mean time, see what other things you can cut back on like eating less expensive food or switching to a less expensive phone plan. If you have stuff you don't need anymore, try selling it on Craiglist or eBay. Or just focus on doing more at work so you can get a raise. These things are not necessary, but it's a good feeling to be able to shave another month or two off paying a debt.

Here's the problem with your suggestion. Tomorrow you trip and fall and knock out two front teeth. Since you'd rather not whistle when you talk, you visit the local dentist. They fix you right up with the appropriate dental work. But this turns out to require dental surgery, and while your insurance coverage takes the brunt of it, you still owe 1800 bucks. So you put it on your credit card. Then a fire in your apartment bldg and your belongings are water damaged. 2500 for clothes, etc. on the card while you wait for your renter's insurance claim. Oh crap. 100 bucks a month in interest.
– XalorousAug 17 '16 at 22:59

@Xalorous: OK, so what's the probability of that happening and what's the interest saving compared with the $100? An emergency fund is a form of self-insurance, and insurance isn't some magical thing for which you should ignore whether or not you're over-paying. $100 a month for the few months it takes to pay off $1800 and wait for the insurance claim is not a ruinous disaster that must be insured at all costs. It's bad, but not unlimitedly bad. Losing your income, maybe that is a ruinous disaster, and PPI salesmen know this when they set the price ;-)
– Steve JessopAug 18 '16 at 8:42

1

Btw I agree that the best rule of thumb is to have an emergency fund. But that's not one of the Ten Commandments to be obeyed without question, it's a choice with reasoning behind it, and the validity of that reason depends on how much the emergency fund costs each month. In this case the questioner's savings cost $5k times 6% per annum minus whatever interest rate they have on their savings account, so it's not hard for the questioner to figure out the price they're paying per month to avoid that risk of a $100 (or whatever: could be more) cost per month. Something under $25 a month.
– Steve JessopAug 18 '16 at 8:51

1

It's absolutely self-insurance. It is literally a gamble. In this case, you have to choose whether risking paying 26% interest on any emergency needs is worth the student loan interest for a longer period. Doing so for one year might cost $480 or so. Lets say the emergency was a 3 month layoff and resulted in 6k in high interest debt. If it takes a year to pay, you've saved 480 by paying the student loan, but incurred up to 1200 in credit card interest. A one year payoff on student loans, while maintaining a comfortable budget with emergency fund sounds pleasant compared to what many face.
– XalorousAug 18 '16 at 12:52

Yep, so paying 480 to avoid a risk of 1200 is well worth it if that kind of misfortune happens to you every 3 years.
– Steve JessopAug 18 '16 at 12:57